Several states, in an effort to circumvent the $10,000 limit on state and local tax deductions imposed by the TCJA, have established charitable funds and then give contributors to the funds a credit, based on a percentage of the amount contributed, against their state, and in some cases, local taxes. The result is a conversion of a limited tax deduction into a charitable contribution deduction. IRS has issued proposed regulations that squash these attempted workarounds. The regs, which apply to post-8/27/18 contributions, specify the charitable contribution in these cases is the difference between the contribution amount and the tax credit.
The IRS subsequently, in information letter IR 2018-178, clarified that business taxpayers who make business-related payments to state charities or government entities for which the taxpayers receive state or local tax credits may deduct these payments as a business expense. Apparently the IRS rationale is that if a state gives the taxpayer credit against the taxpayer’s business taxes, then the so-called charitable contribution is the equivalent to paying their tax liability. Thus the business expense deduction is available to any business taxpayer, regardless of whether it is doing business as a sole proprietor, partnership or corporation, as long as the payment qualifies as an ordinary and necessary business expense and it is an allowed business deduction.